Poter's generic strategy model


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it gives you idea about how firm make strategy on the basis of their strenght

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Poter's generic strategy model

  1. 1. Generic Strategy Model<br />The Michael Porter’s Generic Strategy Model has argued that a firm’s strengths depend on two categories (1). Competitive scope- : (wide & narrow) and (2). Competitive advantages (low cost & product uniqueness). After combining these two categories the Porter model describe strategies to identify its strengths: cost leadership, differentiation and focus. This strategies help to make action plan for SBUs.<br /><ul><li>Cost Leadership Strategy -:
  2. 2.
  3. 3. Under the cost leadership strategy, the corporation produces products at large quantity for mass at a lower cost. Either firm sells its product at average price to get more profit or at below average price (at minimum profit margin) to gain market share.
  4. 4. Even without price war, as the industry is mature and price decline, a firm can produce product more economically for being more profitable at longer period of time (economy of scale). It is usually targeted broad market.
  5. 5. Firms that succeed in cost leadership often have the following internal strengths:
  6. 6. Access to the capital required making a significant investment in production assets; this investment represents a barrier to entry that many firms may not overcome.
  7. 7. Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process.
  8. 8. High level of expertise in manufacturing process engineering.
  9. 9. Efficient distribution channels.</li></ul> For example -: Pizza Hut has been repositioning itself as an affordable casual dining restaurant by effecting major changes in the menu and the look of the restaurant. It added about 10 varieties of pasta, more fried snacks, and a variety of beverages including soups, mocktails, cold coffee, smoothies and spritzers — in short, a fuller menu typical of a casual dining place rather than a quick service restaurant (QSR), he says. The restaurant has got a makeover to reflect that change, replete with changes in the crockery and staff's uniforms.<br />In most developed markets, such restaurants are the largest category in terms of value, he adds. However, in India, because of the nascent nature of the food service industry's development, the segmentation hasn't been clear between QSR, casual and fine dining, though it's beginning to be recognized now. Eateries such as Haldiram's, Saravana Bhavan, KFC and McDonald's would qualify as QSR – they satisfy hunger, but don't offer experience, whereas casual dining restaurants cater to diners who want to celebrate occasions “just a little more than ordinary,” such as catching up with a friend, or want to eat a special meal but not have to pay much; they offer “affordable food as well as an experience”, he elaborates. . “As the economy gallops, consumers are going to upgrade from street food and fast food as there will now be more prosperity to celebrate the same occasions,” he says, adding that Pizza Hut is “very, very aggressively affordable.”<br /><ul><li>Risks
  10. 10. For example, other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share.
  11. 11. Differentiation Strategy -:
  12. 12.
  13. 13. Under this strategy, firm is targeted broad market with the unique attributes which is offer by the firm to customer likes-: features, quality, design, services etc. Price is not play a vital role in this strategy. We can make more loyal customer and charge high price on our premium offering.
  14. 14. Sony is providing vaio at different vibrant colors with active design and more in-build features with personal choice
  15. 15. Firms that succeed in a differentiation strategy often have the following internal strengths:
  16. 16. Access to leading scientific research.
  17. 17. Highly skilled and creative product development team.
  18. 18. Strong sales team with the ability to successfully communicate the perceived strengths of the product.
  19. 19. Corporate reputation for quality and innovation.
  20. 20. Risks
  21. 21. Include imitation by competitors and changes in customer tastes. Additionally, various firms pursuing focus strategies may be able to achieve even greater differentiation in their market segments.
  22. 22. (Source -: http://www.umtweb.edu/umt/freebies/opsmgt/sld003.htm)Dell's Competitive AdvantageDuring the heyday of the technology boom throughout the 1990’s many companies experienced enormous success for a few years, however without creating a solid internal framework many of these companies did not survive. An exception to that business trend is Dell, which was able to address its problems associated with rapid growth, and build itself into a lasting profitable company. Dell was able to create this lasting profitability with three essential ingredients: 1. “Virtual Integration” 2. Real value customer service features 3. Tailoring Manufacturing to customer needs.In 1993 Dell reached a point where it had grown too large, without making the necessary internal improvements to stay profitable. Dell reached a “Eureka” moment in 1993 when its cash flow sank to $20 million, net income was negative $40 million, and its market share had shrunk considerably. By bringing in several seasoned managers to focus on specific aspects of the business Michael Dell hoped that Dell could become a synchronized, efficient, and profitable business again. These improvements lead to Michael Dells breakthrough concept of “virtual integration,” which goes a step further than traditional integration by connecting the right parts together in the business. From this concept three key integrations formed: 1. A symbiotic relationship between Dell and its suppliers; 2. Customers linked directly to manufacturer; and 3. End user was linked to proper customer service assistance. Each one of these measures enabled costs cuts; quicker deliver time, and a more reliable finished product. For instance, with this new symbiotic relationship with its suppliers allowed Dell to trim the number of suppliers it used from 204 to 47 in their Austin facility between 1995 and 1998. These integrations caused the number of days a PC sat in inventory from 32 days to 7 days. By customizing orders the customer received a product tailored to their desires while Dell saved money and time on manufacturing. Tailoring manufacturing to a customer's specific needs allowed Dell to integrate production schedules with sales flows, assemble all parts of the PC on site, and install the specific software that the customer requested. These manufacturing interactions sped up the final products completion time to thirty-six hours. The swiftness of the manufacturing process added value to the customer by quickening the delivery time. As well suppliers wanted to do business with Dell because there inventory levels rarely pilled up. The advantages in this chain of integrations added value to the customer’s product, while also adding value to Dell as a corporation. Dell's corporate value made it one of the best investments in the 1990’s. Dell did something else other PC companies were not doing; strategically targeting only the customers they wanted. By defining their customer as a ‘knowledgeable PC user’ Dell made their task of providing a PC easier. Their customers did not need to go to a retail store to gain knowledge about their product. This enabled the ‘Direct Model’ for purchasing PC’s to work. Dell further expanded its ability to meet customers needs by classify customers into specific categories. Customers were categorized into Relationship buyers, large businesses and institutions, and Transaction buyers, small business and home PC users. The Relational buyers made up a significantly larger portion of Dell’s business but also had different needs than Transaction buyers. Every relational buyer was assigned a representative who guided the business and institution through each stage of the buying experience. By integrating both Relational and Transaction buyers into their business system repeat purchases were quick and easy, purchasing history could be consulted, and follow up customer service was able to be more effective. Dell’s business structure of “virtual integration” allowed it to excel in an incredibly competitive industry. It's competitiveness in the industry resulted from a highly efficient business model that sought out every opportunity to work more productively without compromising the quality of their product. Production efficiency lowered cost which in turn provided Dell with larger profit margins. As Porters Five Forces demonstrates, when bargaining power of buyers is high, the potential for price battles increases. Dell combated failing into the trap of a price battle by making a PC that was a better product than the competitors, yet near their competitor’s price. There costs were able to stay competitive while delivering an exceptional product because their business kept internal costs low, thus showing the effectiveness of “virtual integration.” Like Honda, Dell was able to provide a technologically superior product at a reasonable price. As well, Dell was able to evade a price war because its customers were aware of the technological value in a Dell PC. (Source - : http://hubpages.com/hub/Dells-Competitive-Advantage)</li></ul>Focus Strategy -:<br />Concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation. <br />A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly. <br />Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers. However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist. <br />Firms that succeed in a focus strategy are able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well. <br />Risks<br /> Include imitation and changes in the target segments. Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in order to compete directly. Finally, other focusers may be able to carve out sub-segments that they can serve even better. <br />Conclusion<br />The relationship between market share and profitability is U-shaped. A firm with a low market share can succeed by developing a well-focused strategy. A firm with a high market share can succeed through cost leadership or a differentiated strategy. However, a company can become “stuck in the middle” if it has neither a strong and unique offering nor cost leadership.<br />